# Impact on annualized return

i am holding a bond with a coupon 7.95% issued on 21-Nov-2021 and maturing on 21-Nov-2026 and having Mduration = 3.8. What will be impact on annualized return, if central bank cuts the rate of interest by 25 bps

Is it a government bond, or a corporate bond?

It is a corporate bond with annual interest payment feature. Coupon payment dates are 21-Nov of every year.
Viz.
21-11-2022. 7.95
21-11-2023. 7.95
21-11-2024. 7.95
21-11-2025. 7.95
21-11-2026. 107.95. ( Maturity)

If it were a government bond, then its yield should change by the amount of the central bank’s rate change (assuming that it’s an across-the-board cut), so the price impact will be roughly -Dur_{mod}\times\Delta y

If it’s a corporate bond, then its yield change will likely be less than the benchmark (government) rate change; spreads tend to move opposite benchmark rate changes. The problem is that we don’t know what that spread change will be.

Where did you get this question?

Thks S2000magician…for prompt reply…i have clarification…since the mduration of the bond is 3.8 and if there is a cut by central bank by 25 bps than the impact will be 3.8X25bps( assume move parallel to sovereign bond) = 0.95…thus mean there will percentage price movement is around 0.95 percent…how this move account in annualized return…

Day before the 25bps cut ytm was 7.95 ( price 99.93/ 100) after cut ytm moves to 7.70 ( 100.902/100) the difference in price movement after the cut is 0.9723…

Pls guide me how to reflect the jump in price after 25bps cut into annualized return…

Will i have do 7.70% + .95% =
Or what else to reflect …

Appreciate your help

Regards,
Ni2

The annual return increases by 95 bps.

thnks